All-Capitalist Class War

Where in the annals of class conflict do we put the current tiff between America's investors and its CEOs?

Up until a few weeks ago, this would have been considered a question not worthy of an answer. Both groups bobbed on the same tide. They felt the same exultation when their stock rose, the same apprehension when it fell.

Magically, American capitalism had eliminated class conflict. Whether through their own initiative or their 401(k) plans, roughly half our compatriots were into the market, and all but the dimmest workers knew that wages were a sideshow, that portfolio value was the real stuff. As the bubble economy steadily inflated, the successful CEO not only eclipsed the leading figures in government, but government itself: D.C. dithered, CEOs delivered.

Today the cult of the CEO has disbanded, but even so, the occasional criminality of the wayward CEO would not in itself have pushed investors to revolt. It took the stock option brouhaha to expose this fault line in contemporary capitalism.

To our CEO class, particularly in high-tech, executive stock options are the key to a dynamic, entrepreneurial economy. Link your own payoff to the value of your company's stock and your motivation -- and stock appreciation -- will be beyond measure. Of course, because you're not required to report just how big your payoff really is (how much of an expense it is to the company), you can not only appear to be building a stronger economy but pocket enough change to purchase Versailles for your second home.

Which, investors insist, is precisely the problem. They can't see what the company is shoveling to its CEO; enough shoveling and they have no idea what the company's net income really is. One survey estimates that by not reporting stock options as expenses, corporations listed on Standard & Poor's 500 index may have overvalued profits by at least 10 percent. In high-tech, it's likely some multiple of 10. A study by Bear Stearns concludes that Cisco Systems' operating income in 1999-2000 would have shrunk from $4.6 billion to $2.74 billion if someone had expensed those options. Worse yet, options can tempt CEOs to strike deals that may boost the stock price in time for this year's option season but prove disastrous a couple of years later. Worst of all, funding for productive investments can be diminished by options on this scale.

Hence the class conflict. And who's on whose side in this battle may confound expectation. While the Democrats are doing a generally good job of promoting limited corporate reform, exposing GOP culpability and even questioning the omniscience of the market, they have refused to require CEOs to expense their options, hoping instead that a new accounting oversight board will craft a more CEO-friendly standard. Those Silicon Valley CEOs, after all, are a huge source of Democratic money. The Dems and the techies both favor cultural liberalism, and these CEOs dress too cool to be Republicans. Investors, by contrast, are much too diffuse to target for contributions; many don't like cultural liberalism or look remotely cool (visualize Warren Buffett).

The investors' champion in this fight is John McCain, whose amendment to require the expensing of options was derailed by Tom Daschle. In his best Teddy Roosevelt fashion, McCain seems indifferent to workers' issues as such (he still supports privatizing Social Security), but as a tribune for this somewhat undifferentiated investor class, he's without peer. (Would that workers trapped in a real class war had such a champion.)

And what about these millions of boom-time investors: Didn't they agree to assume risk when they plunged into the market? In fact, most of them didn't agree to anything at all. As Jeff Faux has pointed out ["Who Gets to Retire," TAP, June 17], over the past 25 years the majority of American workers with retirement plans saw their traditional, defined-benefit pensions supplanted by hope-you-come-out-OK 401(k)s. This wasn't their idea; it was management's cost-saving brainstorm. Many are capitalists despite themselves.

Come November, I suspect, millions of these investors will want to shift the burden of risk to someone else. My guess is to Republican members of Congress.